In 2011, I was on my way to NYC from San Jose after a business trip.
I was sitting in front of JetBlue gate at SJC, waiting for my flight which had been delayed for an hour.
I had an OLD copy of that book “Think and Grow Rich” that I bought YEARS ago and had been sitting in my mom’s house collecting dust.
So I started reading it.. and this random dude comes up to me and says “that’s a great book.”
I look up and this guy, and i see this pretty plain dude. He has a Stanford shirt … and reminded me of every other Silicon Valley engineer I’ve ever met.
At that moment, I could’ve just smiled and go about doing my thing.. but on the cover of the book, it says “this book could be worth a million dollars to you.”
So, ‘hell.. maybe, this guy COULD be my million dollars.’ Besides, if nothing else happened, at least I could to meet another decent human being.
But this guy was different. For couple of reasons.
1) He had charisma. He spoke well. He was confident. Something about the guy exuded certainty & confidence.
2) He was an engineer. Hated his job. So he quit and followed his entrepreneurial dreams. And SUCCEEDED.
3) His wife was HOT. Looked like she was 1/2 his age. I think he said he married her BEFORE he got rich.. so more the power to him.
How did he make his money? eCigs.
Yeah, those fake cigarettes w/water vapor & nicotine to help you wean your butt off them poisonous cigarettes.
I told him that I’m a direct response marketer.. and that I used to work with his largest competitor a while back.
Of course, his EARS perked up. He was interested. He told me come by his office.
Few weeks later, I go to his very plain, modest looking distribution warehouse on 101 in Santa Clara.
Nothing extravagant on the outside.. your typical suburban industrial park.. until I went INSIDE.
First of all, he stored his exotic cars there. His “playtoys” as he called them.
I saw a Lamborghini, a Porsche, some car whose model I couldn’t even recognize, and oddly, a white van.
I mean who would’ve thought? T-shirt wearing, non-assuming, and very humble guy who started a multi million dollar business from ground up.
Anywho.. it turns out he’s a BIG time player in the eCig industry.
It turns out he made a TON of money. His distribution channels? 7-11, Chevrons, Valeros… you name it, his product is there.
He was doing multi-millon revenue a year (with zero external funding whatsoever) and he basically wanted to develop his own distribution direct marketing channel. And that’s where I come in. He wants to blast the net with his eCig products.
First of all, i know anything ingested means FTC issues and all that.. so I asked a bunch of questions. (If you work with clients in that space, I highly recommend that you do your homework.) He seems legit.. so we start talking.
Now, most entrepreneurs and business owners contact me to ask for help… and u’d be surprised how little they know about their own customers.
Life Time Value
First and utmost, you HAVE to understand the LTV – lifetime value of your customer.
What does that mean?
If a customer comes to you (the guy selling the service or the product), he/she will eventually pay you right?
So what is the total amount of money he will be paying you over time (i.e. “lifetime”.)
For example, if you run a gym and you bill $20/mo, and you signed him up for 3 years, that’s 3 x 12 x $20 = $720 LTV.
Well, no. What if he/she renews?
Let’s say on the average the person renews twice. So that’s $720 + $720 + $720 = $2,160.
What about all the upsells, cross promotions, and fees? ex. Towel service, paid locker service, weight loss supplements, trainer services, etc etc.
Now, does this include cost of acquisition like advertising, media, etc.? No.
Only YOU as the business owner can know this fact.
(By the way, if you want people like me to help you, you HAVE to share this information. Duh. Do you go to a doctor and not tell him your past history because you’re afraid of “invasion of privacy”? If you do, maybe you should do your surgeries at home instead.)
Here’s a simple calculator.
Take your TOTAL 12 months of revenue divided by number of customers.
VOILA. Accurate? Probably not. But it’s at LEAST something to work with. A benchmark to base and judge your improvements.
So what are the things you have to know?
You MUST know these 3 facts before starting or making an existing lead generation campaign profitable
1) How MUCH does he/she spend with you?
Some people calculate total gross revenue per sale, but I calculate NET revenue per sale.
For example, one of my companies, Solar One Media, is an online lead generation company for the solar industry.
Residential solar PV systems can cost up to $50k.
So is the TOTAL revenue $50k/sale? No way. 60-70% of that is hardware cost.
Operating expense like labor, insurance, rent, etc.. are controllable. Hardward costs, or COGS (cost of goods solds), isn’t something you can really do anything with. So that’s fixed.
So in reality, you should calculate your NET revenue (total – cost of goods sold).
2) How OFTEN does he/she spend with you?
Going back to the solar example, obviously & most likely, you’re not going to buy more than ONE solar system for your house.
But you CAN get into a power purchase agreement where you buy power from a solar company that leases power to you.
In that case, this customer buys from you every month for 10-20 years.
Same with gym.. same with renting a house.. same with any type of rebillable service or product.
3) What is your net margin?
The basic formula = how much x how often x your net margin in %.
I won’t go into detail because EVERY business is different in terms of how they run their company… and every industry is different.
Unless your company is on insane growth mode and/or is funded by investors, you should aim for 20%+ margin to be considered healthy.
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